Cutting VAT to 5% for hospitality & why it won’t happen. 4

This week I had a letter published by The Caterer, concerning their article & campaign about reducing VAT (Value Added Tax) from 20% to 5% for the hospitality industry. The letter was edited, probably due to space restrictions, but the essence still remained & I stand by it. The original article was published on the same day as the ONS (Office for  National Statistics) released the UK’s GDP (Gross Domestic Product) figures. The ONS highlighted that the service sector, and in particular hospitality, had strong growth, which in turn was supporting struggling industries like manufacturing.

In recent times there has been this train of thought that reducing VAT in the hospitality industry will somehow stimulate the economy, as if it’s some kind of silver bullet. Many of its supporters claim that we should have parity with Europe. But have they looked at the bigger picture? No, I doubt it.

The main supporters of cutting VAT often cite how,

Germany, the powerhouse of the Eurozone.

Has reduced VAT (or their equivalent) on accommodation to 7%. Great, but how are they paying for it? Well, in the UK, you get about £9,500 tax free allowance; in Germany  their zero tax rate is £6880. So already a tax cut to help businesses looks like it’s going to be funded by its employees. But it gets even worse, what these advocates of the German system always seem to fail to mention, is that the next tier of  taxation had a 4.9% increase for this current financial year. So again: trainees; kitchen porters; waiters and bar staff are going to be funding this. Yes, in Germany you can earn more; about £12,500 more until you reach their top tier at £44,639, but don’t forget you’ll also have to pay an addition to income tax; solidarity tax, which is capped at 5.5% of your income tax.

The reality of hospitality

The irony of the situation is this, & supporters of the cut won’t like me for saying this; even if this cut happened it would only go as far as to balance the books & increase profits. Very little money would be seen by the employees, and if anybody doubts this, have a look in just about any kitchen & see how many times commis chefs on minimum wages are doing chef de partie jobs. I’m talking from personal experience here & I see it all too often. The hospitality industry has got to get past this attitude of relying on its staff’s goodwill.

income tax

In my letter to The Caterer I used the figure of £1.2billion which HMRC would lose out on if a cut actually took place (as cited by Dermot King from Bourne Leisure). But the fact of the matter is this; supporters of the cut can’t actually quantify a figure. The same week my letter was published, The Caterer ran a story about a lobbying group called the VAT club, run by French entrepreneur, Jacques Borel. Mr Borel claims that

cutting VAT would create 670,000 jobs,

but, and here is the kicker; HMRC would lose between £5.5b & £7.8b!

Great, so the assumption from the 5% VAT movement, is that it MIGHT create jobs (as there is no actual firm evidence to support this), & yet they expect HMRC and thus the wider population to stump up the deficit of anywhere between £1.2b and £7.8b. I’ll put this into context of what this massive amount of money buys you:

  • 3 US nuclear submarines or
  • 5 Boeing 787 – 9 Dreamliners or
  • 9 Wembly Stadiums or
  • 18 Shards, the tallest building in the Euro-zone or
  • 312 New academy schools or
  • 31-260 New Hospitals (costs are varied) 

And here lies the flaw in any argument to reduce VAT. Who is going to pay for it? We already have growth better than any other sector in the economy, so why would HMRC decide to reduce that revenue stream? Even if, and it’s a big if, HMRC cut VAT, would the extra hypothetical 670,000 jobs contribute anything close to the £7.8b deficit caused by creating their jobs? No, primarily because those jobs will be minimum wage. There is already a shortage of skilled people within hospitality, to support that statement;  if there wasn’t, then why is there such a Medusa effect with recruitment companies?

Ultimately my view is that cutting VAT would be a too politically painful pill to swallow, you just can’t expect Joe Bloggs public to support an industry, which is viewed as a luxury item and be seen to be getting a 75% cut in in its VATable rate; and then asking them to pay for it with either higher taxes or cuts to public services.

See here for the original letter in The Caterer


Leave a Reply

4 thoughts on “Cutting VAT to 5% for hospitality & why it won’t happen.

  • PhilSmith

    Nicely balanced opinion. I cannot see restaurants rushing out to get their menus reprinted to reflect a price reduction to the customer. The only ones that will benefit from a VAT cut will be the restaurant owners.

    This is a recession and only the strong will survive. I cannot see any reason for making a particular sector a special case for VAT reduction – especially if the service/product is considered a non-essential luxury.

    • Superyachtchef

      Interesting read..
      As you say, it just won’t happen.
      Just for interest sake, do you know if the HMRC calculation takes into consideration the assumption that consumers would spend a percentage of the amount saved on alternate day to day essentials or indulgences. Hence the loss to the HMRC is not calculable, as it can as you indicate only be based on a set of subjective assumptions.

      • chefhermes Post author

        Many thanks to everybody for the comments.

        RE: Superyatchchef,
        As the figure given by the pro lobby varies massively there isn’t a figure for the amount saved by the public & how they would spend it. Figures from the ONS suggest, that whilst during the recession consumers have reduced spending; it is mainly on big ticket items & only marginally in the service sector.
        A recent survey conducted by ‘Which?’, found that 1 in 5 households used either savings or borrowed money to buy food. Although the poll was only 2000 people, if it is typical of the UK, then this could translate to approximately 5million households.